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Property      

Property investment can be a tricky topic. To make it easier, Peter Switzer answers some common questions.

How to steer clear of mortgage stress

I have been reading about people in mortgage stress paying more than 30 per cent of their income on home repayments. To get finance for a place reasonably close to work, I’d be in that stress situation. I’m thinking about property investment instead. What do you think? I’m 28 and have a good job.

I think you’re being really sensible not putting yourself into mortgage stress and given interest rates could rise this year, that stress could increase.

Lots of people in your situation have actually shopped around for a property investment that they’d like to live in themselves and have bought the place with the idea of renting it out for few years to use the tax deductions from negative gearing to make it affordable.

Then, as their incomes improve and maybe when interest rates fall, they ultimately move into the property. There could be capital gains tax issues, but they can be minimised or even negated with the right advice.

Make sure the property is in an area where tenants want to live and check that the vacancy rates are low. If your job security is good and pretty recession-proof and the property is one that would be in high demand, then you reduce your risks. Also, many landlords use interest only loans, and some, for security, even fix their interest rates, but you can be a bit annoyed if interest rates fall. On the flip side, when they rise, you’re pretty pleased with yourself.

First-time buyers

I’m buying my first investment property. I’ve heard from friends that it may be advantageous to make interest only repayments if the property is purely for investment. Is this true?

More recent convention indicates that many investors – and yes, it tends to be professional landlords – do take the interest only option. Their reasoning is that it reduces the cash outgoings as the monthly repayments are less. The obvious reason is that you’re not paying off some of the principal.

The strategy is, in a nutshell, you buy the property and minimise the monthly costs by using interest only. You can even fix the interest rate, maximise your tax deductions and, as the value of the property rises, the relative size of the debt shrinks.

The professional investors will borrow again after their property gains in capital value by showing the bank that the LVR on the first house has gone down. This gives a chance to buy another property if their income and cash flow supports the plan. By paying off the principal, you reduce your cash flow and your chances to get more property.

On the other hand, many people like the comfort of paying down the principal and that just might suit their psychological bent. However, by tax law you can only claim the interest component of your mortgage repayments when you’re a landlord, though I reckon heaps of Aussies make a mistake on their tax return with this one.

Before you become a landlord or consider investing in property, do a lot of reading and even go to seminars, but don’t get sucked in by the product flogging that goes with these often hyped up events.

For advice you can trust, book a complimentary first appointment with Switzer Financial Services today.

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